Businesses need to pay attention to the tax reforms of the last few months if they are to avoid falling foul of legislation

In recent years, China has been implementing significant nationwide tax reform, making changes that even the most responsible businesses may struggle to keep up with. As reported recently, stronger enforcement of existing compliance requirements and restructuring government bodies the government aims to reduce fraud and improve statutory oversight.

It seems to be working. Already the Chinese government has reduced value-added tax across a range of industries thanks to the additional tax revenue coming in, and stronger enforcement is also seen as a key factor in plans to further reduce corporate income taxes and various social security rates.

A brief history of Chinese tax reform

Beginning with the “Golden Tax 3” plan in 2016, which officially transitioned China from being a “fapiao driven tax system” to an “information-driven tax system”, the new tax policies signal a new era for taxation in China. Chiefly characterized by increased financial oversight and greater efficiency when identifying tax evasion and resolving tax disputes, the “Golden Tax 3” reforms also allow tax authorities to include the personal bank account of a business’s legal representative within the scope of a company audit.

Since July 2018, China’s state and local tax bureaus have been integrated, allowing them to consolidate the sets of data from different financial reports filed by a business. This restructuring has significantly improved the efficiency of tax administration, enabling speedy identification of inaccurate reporting and the quick resolution of tax disputes.

It is this kind of administrative restructuring and data sharing across different government bodies that is going to make taxable income more difficult to manipulate and revenue harder to conceal. For many businesses, this will mean paying more taxes. However, as a direct result of the additional tax revenue collected, the tax authorities have announced they will be further reducing corporate tax rates later in 2019, so the tax burden will be reduced for those who are already accurately declaring their tax.

Reform will bring benefits to foreign companies in China who currently adhere to the regulations and pay their taxes

From February 2019, the Peoples Bank of China (PBC) began abolishing the “Corporate Bank Account Opening License” in Jiangsu Province and Zhejiang Province, and will have abolished it nationwide by the end of the year. Originally intended for the central bank to exercise control of all new accounts created in China, with the cancellation of the license, the Chinese central bank will instead exercise control through increased monitoring of both company and personal transactions on a day to day basis. Transactions that exceed predetermined amounts and frequency will be flagged and reported to the PBC for investigation. The predetermined limits are as follows:

• Corporate bank account: A single or cumulative transaction that reaches or exceeds RMB 2 million in a single day.
• Personal bank account: A single or cumulative transaction that reaches or exceeds RMB 500k for domestic transactions in a single day; RMB 200k or USD 10k for overseas transactions in a single day.
• Cash transactions: A single or cumulative cash transaction that reaches or exceeds RMB 50k in a single day.

It’s not uncommon for legitimate transactions to exceed these preset limits and is therefore essential that businesses have sufficient evidence to support the authenticity of transactions if questioned.

Building a credit system

The Chinese government has also been working to build a social credit system within the business environment. Real name authentication for legal representatives, business owners (including the “real” business owner if the majority shareholder is a placeholder), registered finance directors, and even the registered tax accountants have been made an important part of this. Complete and accurate financial reporting has, therefore, become very important for the business owner and the accountant as it directly impacts their personal credit.

Detailed within the Measures for the Information Disclosure of Major Taxes and Untrustworthy Cases (State Administration of Taxation [2018] No. 54) are the thresholds for tax evasion and dishonest behaviour that will result in a credit rating decreasing to class “D”, the lowest class. These include:

• An accumulated tax shortage in excess of RMB 1 million, or exceeding 10 percent of the total tax payables in a year.
• Preventing the authorities from collecting overdue taxes exceeding RMB 100k.
• Either issuing over 100 pieces of false VAT fapiaos or false VAT fapiaos that amount to RMB 400,000 or more
• Other serious violations of tax law with a significant social impact

Companies with a credit rating of D will not only face many difficulties in their business operations but these will also affect the owner and responsible accountant’s personal life. Such restrictions include limitations on travelling outside of China, reduced access to loans, domestic travel restrictions and limited access to their own cash. Thus, proper financial management has become very important for the business owner and also accountants.

Eventually, reform will bring benefits to foreign companies in China who currently adhere to the regulations and pay their taxes. The flip side of this is that, with more stringent oversight, it will be increasingly common that poor accounting practices and non-compliance will result in financial penalties. Business owners are therefore advised to review their compliance status and correct any issues sooner rather than later.

By Lily Li, FCCA, managing partner and director of small business finance advisory at Axel Standard. She has an MBA in finance and has served as CFO for multiple MNCs in China.

 For more information about tax issues speak to CBBC’s Avi Nagel on avi.nagel@cbbc.org